Rate cut could be on the cards, hints King

27 March 2008 / by Rachael Stiles
Bank of England Governor Mervyn King has said that a cut in the base rate is more likely to take place in the coming month than it was in March.

Mr King admitted that the Monetary Policy Committee, which meets each month to determine whether or not to change the base rate, is prepared to lower it in order to offset the widening gap caused by the credit crisis.

In an opening statement to the commons yesterday, the Governor emphasised that there is an ongoing balancing act between inflation and interest rates, with inflation remaining a primary motivation for base rate decisions; this week, it rose to 2.5 per cent, breaking the Government-imposed target of two per cent. "Our central projection is for inflation to fall back towards the 2% target." said Mr King.

"The time lag between changes in interest rates and their impact on inflation means that the MPC can have little effect on the short-term path of inflation.", he said, but a rate cut could help to ease the consumer's budget by lowering mortgage repayments and making credit more easily available.

Mortgage experts at John Charcol are adamant that a rate cut is needed, despite the gloomy figures from inflation and growth, to help lenders secure funding in their struggle against the credit crisis.

“A further Bank Rate cut would not normally be expected in an environment of improved growth expectations combined with inflation climbing to 1% over target." said John Charcol’s Katie Tucker. "However, cash-strapped homeowners will be relieved to know that some relief to their purse-strings may still be due, as mortgage lenders’ own cost of borrowing is high, and a further Bank Rate cut may be used to relieve this.

"The hope for buyers and homeowners, will be that the Monetary Policy Committee is not deterred from implementing another rate cut soon, by having to write a letter of explanation to the Chancellor to explain why inflation has exceeded 3%."

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